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(S) AP Macro Test #2

The AP Macroeconomics Exam consists of 60 multiple-choice questions to be completed in 1 hour and 10 minutes, with no penalties for incorrect answers. The exam assesses knowledge of macroeconomic concepts and policies, with instructions on how to answer and record responses. The document includes sample questions and emphasizes effective time management during the exam.

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0% found this document useful (0 votes)
354 views

(S) AP Macro Test #2

The AP Macroeconomics Exam consists of 60 multiple-choice questions to be completed in 1 hour and 10 minutes, with no penalties for incorrect answers. The exam assesses knowledge of macroeconomic concepts and policies, with instructions on how to answer and record responses. The document includes sample questions and emphasizes effective time management during the exam.

Uploaded by

celine
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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AP Macroeconomics Exam

SECTION I: Multiple Choice

DO NOT OPEN THIS BOOKLET UNTIL YOU ARE TOLD TO DO SO.

At a Glance Instructions
Section I of this exam contains 60 multiple-choice questions. Fill in only the circles for
Total Time numbers 1 through 60 on your answer sheet.
1 hour and 10 minutes
Number of Questions Indicate all of your answers to the multiple-choice questions on the answer sheet. No
60 credit will be given for anything written in this exam booklet, but you may use the booklet
Percent of Total Score for notes or scratch work. After you have decided which of the suggested answers is best,
66.67% completely fill in the corresponding circle on the answer sheet. Give only one answer to
Writing Instrument each question. If you change an answer, be sure that the previous mark is erased
Pencil required completely. Here is a sample question and answer.
Electronic Device
None allowed

Use your time effectively, working as quickly as you can without losing accuracy. Do not
spend too much time on any one question. Go on to other questions and come back to
the ones you have not answered if you have time. It is not expected that everyone will
know the answers to all of the multiple-choice questions.
Your total score on the multiple-choice section is based only on the number of questions
answered correctly. Points are not deducted for incorrect answers or unanswered
questions.
The inclusion of source material in this exam is not intended as an
endorsement by the College Board or ETS of the content, ideas, or
values expressed in the material. The material has been selected by
the economics faculty who serve on the AP Macroeconomics
Development Committee. In their judgment, the material printed here
reflects various aspects of the course of study on which this exam is
based and is therefore appropriate to use to measure the skills and
knowledge of this course.

-2-
MACROECONOMICS
Section I
Time —1 hour and 10 minutes
60 Questions

Directions: Each of the questions or incomplete statements below is followed by five suggested answers or
completions. Select the one that is best in each case and then fill in the corresponding circle on the answer sheet.

1. Which of the following typically occurs during an 5. Which of the following will most likely result
expansionary phase of a business cycle? from deflation?
(A) Nominal interest rates decrease. (A) Increased nominal interest rates
(B) Income taxes decrease. (B) Increased business profits
(C) The price level decreases. (C) Increased real value of fixed incomes
(D) Government transfer payments increase. (D) Decreased purchasing power of cash
(E) Employment increases. (E) Decreased real wealth

2. Economic growth refers to an increase in which of 6. Which of the following is a defining characteristic
the following? of a fractional reserve banking system?
(A) Government spending (A) The existence of a central bank with
(B) Consumption spending a monopoly on money creation
(C) Nominal gross domestic product (B) The use of paper money backed by
(D) Potential real gross domestic product a commodity such as gold or silver
(E) Household wealth (C) The fact that banks retain an amount of bank
reserves that is less than the amount of
3. If both the nominal interest rate and the expected customer demand deposits
inflation rate increase, what will happen to the (D) The requirement that banks maintain a certain
real interest rate? percentage of their reserves as a deposit in
an account at the central bank
(A) It will increase because the expected inflation
(E) The regulations that separate investment
rate has increased.
banking from commercial banking
(B) It will increase because the nominal interest
rate has increased.
7. A negative aggregate supply shock will result in
(C) It will increase if the expected inflation
which of the following in the short run?
rate increases by more than the nominal
interest rate. (A) An increase in the price level and a decrease
(D) It will decrease because the nominal interest in the unemployment rate
rate has increased. (B) A decrease in the price level and an increase
(E) It will decrease if the expected inflation in the unemployment rate
rate increases by more than the nominal (C) A decrease in both the price level and real
interest rate. output
(D) An increase in both the price level and real
4. Which of the following statements is true about an output
expansionary fiscal policy? (E) An increase in both the price level and the
unemployment rate
(A) It decreases demand for loanable funds.
(B) It decreases the equilibrium price level.
(C) It decreases the equilibrium real interest rate.
(D) It increases aggregate demand.
(E) It increases the money supply.

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-3-
8. Which of the following combinations of fiscal 11. Suppose that a country’s nominal gross domestic
and monetary policies will correct a severe product (GDP) was $1,000 in year 1 and $2,000
recession? in year 2. If year 1 is the base year and real GDP
in year 2 was $1,000, which of the following
(A) Increasing income tax rates and increasing is true?
administered interest rates
(A) Prices fell by 50% between year 1 and year 2.
(B) Increasing income tax rates and decreasing (B) Prices doubled between year 1 and year 2.
administered interest rates (C) Prices remained the same between year 1 and
(C) Decreasing income tax rates and increasing year 2.
administered interest rates (D) More goods and services were produced in
(D) Decreasing income tax rates and decreasing year 2 than in year 1.
administered interest rates (E) Fewer goods and services were produced in
year 2 than in year 1.
(E) Decreasing income tax rates and increasing
the policy rate . Assume a country has limited reserves in its
banking system. To decrease the money supply,
9. Which of the following would decrease the the country’s central bank can do which of the
United States net exports to South Korea? following?
(A) South Korean computer companies sell more (A) Sell government bonds
computers to the United States.
(B) South Korean insurance companies provide (B) Decrease the discount rate
fewer services to the United States. (C) Decrease the required reserve ratio
(C) South Koreans spend more vacations in the (D) Increase taxes
United States.
(E) Increase government spending
(D) United States banks provide more banking
services to South Korea.
(E) United States smartphone companies sell 13. Which of the following types of unemployment is
more smartphones to South Korea. caused by a recession?
(A) Hidden
10. An increase in the purchases of newly constructed (B) Frictional
houses will result in which of the following? (C) Seasonal
(A) Aggregate demand will decrease as a result of (D) Structural
a decrease in the price level. (E) Cyclical
(B) Aggregate demand will increase as a result of
an increase in investment spending. 14. If the United States government increases deficit
(C) Aggregate demand will increase as a result of spending, which of the following will occur as a
an increase in exports. result of the change in the interest rate?
(D) Aggregate demand will not change, since (A) The United States dollar will appreciate in
consumer spending has not changed. foreign exchange markets.
(E) Aggregate demand will not change, since (B) Household savings in the United States will
investment spending has not changed. decrease.
(C) The United States exports will increase.
(D) The demand for United States dollars will
decrease.
(E) Private investment in plant and equipment in
the United States will increase.

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-4-
15. In the short run, an increase in the policy rate 17. An increase in government spending financed
will cause by increased borrowing will most likely change
the real interest rate and the gross private
(A) a rightward shift in the aggregate demand
domestic investment in which of the
curve
following ways?
(B) a leftward shift in the aggregate demand
curve Real Gross Private
(C) a rightward shift in the aggregate supply Interest Rate Domestic Investment
curve (A) No change No change
(D) a leftward shift in the aggregate supply curve (B) Decrease Increase
(E) a movement along the aggregate demand (C) Decrease Decrease
curve (D) Increase Decrease
(E) Increase Increase
16. How will an increase in demand and a
simultaneous decrease in supply affect the 18. If real interest rates in the United States fall
equilibrium price and quantity of a good in relative to real interest rates in Great Britain,
a market? which of the following will occur?
Price Quantity (A) British investors will buy more United States
securities.
(A) Increase Increase
(B) British exports to the United States will
(B) Increase Indeterminate
increase.
(C) Decrease Increase
(C) The supply of dollars will decrease.
(D) Decrease Indeterminate
(D) United States investors’ demand for British
(E) Indeterminate Indeterminate
pounds will decrease.
(E) The British pound will appreciate relative to
the dollar.

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-5-
Good X Good Y
Price Quantity Price Quantity
Year 1 $2 2 $1 4
Year 2 $3 2 $2 4

20. Assume that an economy produces just two


goods, X and Y, as shown in the table above. If
year 1 is the base year, the consumer price index
for year 2 in this economy is

19. A country’s economy is currently in equilibrium (A) 57.1


at point R. Which of the following policy actions (B) 66.7
could the country’s government take to achieve (C) 100
potential output (YP) ? (D) 175
(E) 250
(A) Decreasing the money supply
(B) Decreasing investment tax credits 21. Which of the following is LEAST likely to affect
(C) Increasing interest rates the long-run growth of an economy?
(D) Increasing government expenditures (A) Investment in physical capital
(E) Increasing the minimum wage (B) Research and development
(C) Education and training
(D) A specific tax on luxury goods
(E) Stable and efficient institutions

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-6-
22. Pat deposits a portion of her wages into a personal 26. An ongoing increase in the price of oil will
savings account every week. The saved money result in
can be considered to be primarily a
(A) demand-pull inflation
(A) means of payment (B) cost-push inflation
(B) unit of account (C) expansionary fiscal policy
(C) store of value (D) a decrease in the prices of substitute forms
(D) measure of value of energy
(E) medium of exchange (E) deflation

23. An increase in the number of which of the 27. Assume that Country X and Country Y are trading
following will lead to an increase in the partners. If the average income in Country X
unemployment rate? increases, which of the following will occur in the
foreign exchange market?
(A) Discouraged workers
(B) Business start-ups (A) The demand for Country X’s currency will
(C) Self-employed persons increase, and Country X’s currency will
(D) Persons working 30 instead of 40 hours appreciate.
per week (B) The demand for Country Y’s currency will
(E) Persons quitting part-time jobs to look increase, and Country X’s currency will
for full-time ones depreciate.
(C) The demand for Country Y’s currency will
24. An economy experiences a sharp increase increase, and Country X’s currency will
in energy prices, and policy makers adopt appreciate.
a stabilization policy to increase aggregate (D) The supply of Country X’s currency will
demand. Compared with the initial short-run decrease, and Country X’s currency will
equilibrium, which of the following will appreciate.
definitely occur? (E) The supply of Country Y’s currency will
increase, and Country Y’s currency will
(A) Lower level of output
depreciate.
(B) Higher level of output
(C) Lower price level
(D) Higher price level
(E) Higher aggregate supply

25. Assume that the marginal propensity to consume


is 0.8. If the government increases its purchases
of goods and services by $200 and exports
decline by $50, at most the equilibrium level
of income will
(A) decrease by $250
(B) decrease by $1,000
(C) increase by $150
(D) increase by $750
(E) increase by $1,250

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-7-
28. Assuming a banking system with limited 32. Sam and Bill run a leaf raking and lawn mowing
reserves, which of the following is a monetary business. In one day, Sam can rake 3 lawns or
policy aimed at increasing the equilibrium mow 5 lawns whereas Bill can rake 2 lawns or
interest rate in the money market? mow 6 lawns. Which of the following correctly
describes Sam’s and Bill’s absolute and
(A) Raising taxes comparative advantages?
(B) Lowering the discount rate (A) Sam has a comparative advantage in raking
(C) Lowering the federal funds rate and an absolute advantage in mowing.
(B) Sam has a comparative advantage in mowing
(D) Selling bonds on the open market and an absolute advantage in raking.
(E) Lowering the required reserve ratio (C) Sam has a comparative advantage in mowing
and an absolute advantage in mowing.
29. Which of the following monetary and fiscal (D) Bill has a comparative advantage in mowing
policy mixes will reduce unemployment? and an absolute advantage in mowing.
(E) Bill has a comparative advantage in raking
(A) Decreasing interest on reserves and and an absolute advantage in mowing.
increasing taxes
33. People who have given up looking for jobs are
(B) Decreasing interest on reserves and classified as
decreasing taxes
(A) cyclically unemployed
(C) Increasing interest on reserves and
(B) frictionally unemployed
increasing government spending
(C) structurally unemployed
(D) Increasing interest on reserves and (D) discouraged workers
decreasing government spending (E) underemployed workers
(E) Increasing interest on reserves and
increasing taxes 34. Banks expand the money supply when
(A) issuing credit cards
30. Which of the following is correct according to the (B) printing money
circular flow model of an economy? (C) cashing checks
(D) making loans
(A) Taxes received from the public equal
(E) accepting deposits
government spending.
(B) Imports equal exports.
35. The economy is currently in long-run equilibrium.
(C) Total spending equals total income.
If the central bank increases the money supply, in
(D) Consumption plus saving equals investment.
the long run the price level will
(E) Saving plus investment equals imports plus
exports. (A) increase, and output will remain at the
full-employment level
31. If the short-run aggregate supply curve is upward (B) increase, and output will be above the
sloping, which of the following will cause full-employment level
inflation? (C) increase, and output will be below the
full-employment level
(A) An increase in long-run aggregate supply
(D) remain unchanged, and output will remain
(B) An increase in short-run aggregate supply
at the full-employment level
(C) An increase in aggregate demand
(E) remain unchanged, and output will be above
(D) A decrease in aggregate demand
the full-employment level
(E) A decrease in aggregate demand and
an increase in aggregate supply

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-8-
36. The crowding out effect of government spending 39. Increases in government subsidies to encourage
will be large if investment in research and development will
affect aggregate demand (AD) and long-run
(A) investment is highly sensitive to changes
aggregate supply (LRAS) in which of the
in the interest rate
following ways?
(B) consumption is highly sensitive to changes
in wealth AD LRAS
(C) money demand is highly insensitive to
(A) Increase Increase
changes in income
(B) Increase Decrease
(D) it takes a long time for changes in
(C) Increase No change
government spending to cause a change
(D) Decrease Increase
in equilibrium income
(E) Decrease No change
(E) the long-run aggregate supply curve is
horizontal
40. If an automobile was manufactured in 2006 and
sold to a consumer in 2007, what was the effect
37. When the United States dollar appreciates against
on gross domestic product in 2006 and 2007?
the euro, which of the following will most likely
happen? 2006 2007
(A) No change Increase
(A) European firms will pay fewer euros
(B) Decrease Increase
for equipment purchased from the
(C) Increase No change
United States.
(D) Increase Decrease
(B) European products will become more
(E) No change No change
expensive for United States consumers.
(C) United States tourists will pay fewer dollars
41. If the government implements an expansionary
for trips to Europe.
fiscal policy, how will real gross domestic product
(D) The European trade deficit will increase.
(GDP) and the price level be affected in the
(E) The United States trade deficit will decrease.
short run?
38. Which of the following will occur in the money
market when the aggregate price level increases? Real GDP Price Level

(A) The money supply will increase and nominal (A) Increase Decrease
interest rates will decrease. (B) Decrease No change
(B) The demand for money will increase and (C) No change Increase
nominal interest rates will decrease. (D) Increase Increase
(C) The demand for money will increase and (E) Decrease Decrease
nominal interest rates will increase.
(D) The demand for money will decrease and 42. Which of the following will most likely contribute
nominal interest rates will decrease. to long-run economic growth?
(E) The opportunity cost of holding money will (A) High levels of household spending
decrease. (B) High levels of government spending
(C) High levels of investment in plant and
equipment
(D) Low levels of immigration to the country
(E) Low levels of foreign investment in the
country

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-9-
43. Which of the following is true when interest Total Population 300
rates rise?
Working-age Population 200
(A) The opportunity cost of holding cash
decreases. Unemployed 10
(B) The opportunity cost of holding cash
Employed 90
increases.
(C) The opportunity cost of holding cash stays
the same. 46. The table above gives population and
(D) The money demand curve shifts to the right. labor-market data for an economy. The
(E) The money supply curve shifts to the right. unemployment rate in this economy is
(A) 3.3%
44. Which of the following is an example of fiscal (B) 5%
policy? (C) 10%
(A) Decreasing income tax rates (D) 33.3%
(B) Increasing the money supply (E) 50%
(C) Decreasing the discount rate
(D) Selling government bonds 47. In the short run, how would a government’s
(E) Decreasing the required reserve ratio budget deficit, national debt, and real output
change if government spending increases with no
45. All of the following explain why prices and wages change in taxes?
are sticky EXCEPT Deficit Debt Real Output
(A) menu costs experienced by firms (A) Increase Increase Decrease
(B) efficiency wages paid to labor (B) Increase Decrease Increase
(C) misperceptions about relative prices by (C) Increase Increase Increase
suppliers (D) Decrease Decrease Increase
(D) competition in the business sector (E) Decrease Increase Decrease
(E) labor contracts covering multiple years

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-10-
51. Which of the following is most likely included in
gross domestic product?
(A) Matt gives his secondhand bicycle to his
brother.
(B) Sal paints his own bicycle.
(C) Ali buys a new bicycle.
(D) Mike buys a share of stock in a bicycle firm.
(E) Daniel bikes to school every day.

52. Which of the following is likely to result in an


inflow of financial capital to Country R?

(A) A decrease in Country R’s government


budget deficit
48. The graph above shows the production (B) An increase in personal income tax rates in
possibilities curves (PPC) for an economy. Country R
The concept of opportunity cost is best (C) An increase in administered interest rates
represented by which of the following? by the central bank of Country R
(A) A shift from PPC1 to PPC2 (D) An increase in Country R’s trade surplus
(B) A movement from point A to point D (E) Increased political instability in Country R
(C) A movement from point B to point C
(D) A movement from point C to point E
53. A bank has $200 million in demand deposits
(E) A movement from point D to point B
and $150 million in reserves. The reserve ratio
is 20 percent. What is the maximum amount of
49. If the central bank of Country K wishes to loans the bank can make from its reserves?
increase the value of its currency on foreign
exchange markets, it can do which of the (A) $750 million
following? (B) $150 million
(C) $110 million
(A) Buy the currencies of other countries (D) $50 million
(E) $40 million
(B) Increase the domestic money supply in
Country K 54. Which of the following is true about the
(C) Increase the income tax in Country K Phillips curve?
(D) Raise interest rates in Country K (A) A change in aggregate demand does not shift
(E) Increase tariffs in Country K the long-run Phillips curve (LRPC).
(B) A change in aggregate demand does not
50. An increase in the expected inflation rate will cause a movement along the short-run
cause the Phillips curve (SRPC).
(C) The LRPC shows the trade-off between
(A) short-run Phillips curve to shift to the left unemployment and inflation but the SRPC
(B) short-run Phillips curve to shift to the right does not.
(C) long-run Phillips curve to shift to the left (D) Changes in expected inflation affect the
(D) long-run Phillips curve to shift to the right LRPC only.
(E) actual inflation rate to fall below the expected (E) Negative supply shocks affect the LRPC
inflation rate only.

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-11-
55. When the total amount the government spends 57. Which of the following statements about inflation
equals tax revenues in any given year, which of is true?
the following must remain constant?
(A) The expected inflation rate is the difference
(A) The real interest rate between nominal and real interest rates.
(B) The national debt (B) Low expected inflation rates lead to high
(C) Real gross domestic product inflation rates.
(D) The price level (C) Lenders lose from expected inflation.
(E) The money supply (D) Lenders gain from unexpected inflation.
(E) Workers lose from expected inflation.
56. How does the automatic adjustment mechanism
move the economy to potential real gross 58. The opportunity cost of an activity is
domestic product (GDP) in the long run when
(A) the amount of time spent on the activity
current real GDP is above potential GDP?
(B) the value of the benefit received from
(A) Nominal wages fall, shifting the short-run performing the activity
aggregate supply curve to the right. (C) the value of the forgone benefit of the next
(B) Nominal wages fall, shifting the short-run best alternative
aggregate supply curve to the left. (D) zero if the activity offered no benefits
(C) Nominal wages do not change, shifting (E) the sum of benefits from all the sacrificed
the short-run aggregate supply curve to alternatives
the right.
(D) Nominal wages rise, shifting the short-run
aggregate supply curve to the right.
(E) Nominal wages rise, shifting the short-run
aggregate supply curve to the left.

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59. Increased spending on which of the following 60. If consumers in Canada increase their demand for
contributes most to long-term economic growth? products that are manufactured in India, which of
the following will occur?
(A) Social security and other transfer payments
(B) New automobiles and homes (A) The Indian rupee will depreciate.
(C) Education and infrastructure (B) The Canadian dollar will appreciate.
(D) Imported consumer goods (C) India’s financial capital inflow will increase.
(E) Interest payments on national debt (D) Canada’s financial capital inflow will
increase.
(E) The supply of Canadian dollars will decrease.

END OF SECTION I

IF YOU FINISH BEFORE TIME IS CALLED, YOU MAY


CHECK YOUR WORK ON THIS SECTION.

DO NOT GO ON TO SECTION II UNTIL YOU ARE TOLD TO DO SO.

MAKE SURE YOU HAVE DONE THE FOLLOWING.

• PLACED YOUR AP ID LABEL ON YOUR ANSWER SHEET

• WRITTEN AND GRIDDED YOUR AP ID CORRECTLY ON YOUR


ANSWER SHEET

• TAKEN THE AP EXAM LABEL FROM THE FRONT OF THIS BOOKLET


AND PLACED IT ON YOUR ANSWER SHEET

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-13-
AP Macroeconomics Exam
®

SECTION II: Free Response, Questions

DO NOT OPEN THIS BOOKLET UNTIL YOU ARE TOLD TO DO SO.

At a Glance Instructions
The questions for Section II are printed in this orange booklet. You may use the pages in
Total Time this booklet to organize your answers and for scratch work, but you must write your
1 hour answers in the separate Section II: Free Response booklet. No credit will be given for any
Number of Questions work written in this orange booklet.
3
Percent of Total Score The proctor will announce the beginning and end of the reading period. You are advised
33.33% to spend the 10-minute period reading all the questions and planning your answers. You
Writing Instrument may begin writing your responses before the reading period is over.
Pen with black or dark
blue ink Write clearly and legibly. Begin your response to each question at the top of a new page;
Electronic Device completely fill in the circle at the top of each page that corresponds to the question you
None allowed are answering. Cross out any errors you make; crossed-out work will not be scored.
Reading Period Manage your time carefully. You may proceed freely from one question to the next. You
Time
may review your responses if you finish before the end of the exam is announced.
10 minutes. Use this
time to read the
questions and plan your
answers. You may begin
writing your responses
before the reading
period is over.

Writing Period
Time
50 minutes

Question 1
Suggested Time
25 minutes
Percent of Section II Score
50%

Question 2
Suggested Time
12.5 minutes
Percent of Section II Score
25%
Question 3
Suggested Time
12.5 minutes
Percent of Section II Score
25%
MACROECONOMICS
Section II
Total Time—1 hour
Reading Period—10 minutes
Writing Period—50 minutes

Directions: You are advised to spend the first 10 minutes reading all of the questions and planning your
answers. You will then have 50 minutes to answer all three of the following questions. You may begin
writing your responses before the reading period is over. It is suggested that you spend approximately half
your time on the first question and divide the remaining time equally between the next two questions.
Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled
diagram must have all axes and curves clearly labeled and must show directional changes. If the question
prompts you to "Calculate," you must show how you arrived at your final answer. Use a pen with black or
dark blue ink.

Question 1 begins on page 4.


Question 2 begins on page 10.
Question 3 begins on page 14.

THIS PAGE MAY BE USED FOR TAKING NOTES AND PLANNING YOUR ANSWERS.
NOTES WRITTEN ON THIS PAGE WILL NOT BE SCORED.
WRITE ALL YOUR RESPONSES ON THE LINED PAGES.

GO ON TO THE NEXT PAGE.


-3-
1. Assume a country’s economy is currently in recession.
(a) Draw a correctly labeled graph of the long-run aggregate supply, short-run aggregate supply, and aggregate
demand curves, and show each of the following.
(i) Current real output, labeled Y1, and current price level, labeled PL1
(ii) Full employment output, labeled Yf
( ) Assuming the banking system has ample reserves, identify one action the central bank can take to help the
economy recover from the recession.
( ) Draw a correctly labeled graph of the reserve market, and show the impact of the central bank’s action
identified in part (b) on the policy rate.
(d) On your graph for part (a), show the effect of the central bank’s action identified in part (b) on real output
and the price level.
(e) Assume there is an increase in business confidence as a result of the central bank’s action.
(i) What will happen to the demand for capital goods?
(ii) Draw a correctly labeled graph of the loanable funds market, and show the effect of the change
identified in part (e)(i) on the real interest rate.
(f) Given your answer to part (e), what is the effect on potential real output in the long run? Explain.

THIS PAGE MAY BE USED FOR TAKING NOTES AND PLANNING YOUR ANSWERS.
NOTES WRITTEN ON THIS PAGE WILL NOT BE SCORED.
WRITE ALL YOUR RESPONSES ON THE LINED PAGES.

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-4-
ANSWER PAGE FOR QUESTION 1

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-5-
Question 1 is reprinted for your convenience.

1. Assume a country’s economy is currently in recession.


(a) Draw a correctly labeled graph of the long-run aggregate supply, short-run aggregate supply, and aggregate
demand curves, and show each of the following.
(i) Current real output, labeled Y1, and current price level, labeled PL1
(ii) Full employment output, labeled Yf
( ) Assuming the banking system has ample reserves, identify one action the central bank can take to help the
economy recover from the recession.
( ) Draw a correctly labeled graph of the reserve market, and show the impact of the central bank’s action
identified in part (b) on the policy rate.
(d) On your graph for part (a), show the effect of the central bank’s action identified in part (b) on real output
and the price level.
(e) Assume there is an increase in business confidence as a result of the central bank’s action.
(i) What will happen to the demand for capital goods?
(ii) Draw a correctly labeled graph of the loanable funds market, and show the effect of the change
identified in part (e)(i) on the real interest rate.
(f) Given your answer to part (e), what is the effect on potential real output in the long run? Explain.

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2. The exchange rate between the Australian dollar and the Indian rupee is determined in a flexible foreign
exchange market.
(a) Assume India is currently in recession. What fiscal policy action could the Indian government take to
eliminate the recession?
(b) What would be the effect of the fiscal policy action identified in part (a) on interest rates in India?
(c) Draw a correctly labeled graph of the foreign exchange market for the Australian dollar. Show on your
graph the impact of the change in interest rates identified in part (b) on each of the following.
(i) The supply of Australian dollars
(ii) The equilibrium exchange rate of the Australian dollar
(d) What would be the effect of the change in the exchange rate identified in part (c)(ii) on Australian exports?
(e) What would be the effect of the change in Australian exports identified in part (d) on Australian
unemployment?

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3. Gross domestic product (GDP), unemployment, inflation, and economic growth are key measures of a country’s
economic performance.
The following statistics are from the country of Pattiland in 2016; dollar values are measured in 2016 dollars.

Consumption $90 Population 50


Investment $65 Labor force 25
Exports $25 Employed 20
Imports $50
Government spending $50 GDP deflator (2016) 90
Taxes $20

(a) Calculate each of the following and show your work.


(i) Nominal GDP
(ii) Real GDP
(iii) Real GDP per capita
(b) Debbie is a citizen of the country of Wayland and owns a computer software firm in Pattiland. Is the output
produced by Debbie’s computer software firm included in Pattiland’s nominal GDP calculated in part (a) ?
Explain.
(c) The GDP deflator for Pattiland in 2015 was 110. In 2016 was Pattiland experiencing inflation or deflation,
or is there insufficient information to determine Pattiland’s economic condition? Explain.
(d) Calculate the unemployment rate in Pattiland. Show your work.

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STOP

END OF EXAM

THE FOLLOWING INSTRUCTIONS APPLY TO THE COVERS OF THE


SECTION II BOOKLET.

• MAKE SURE YOU HAVE COMPLETED THE IDENTIFICATION


INFORMATION AS REQUESTED ON THE FRONT AND BACK
COVERS OF THE SECTION II BOOKLET.

• CHECK TO SEE THAT YOUR AP ID LABEL APPEARS IN THE


BOX ON THE FRONT COVER.

• MAKE SURE YOU HAVE USED THE SAME SET OF AP ID


LABELS ON ALL AP EXAMS YOU HAVE TAKEN THIS YEAR.

-18-

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